State & Federal Changes Affecting Public Finance

1. State & Federal Changes Affecting Public Finance IASBO Spring ConferenceMay 18, 2011 2:15pm – 3:15pmMarsalis 1 & 2 Paul Seymour Business Manager East Moline 37 pseymour@EMSD37.org 309.792.2887 Lynda Given Partner Chapman and Cutler LLP given@chapman.com 312.845.3814 Bob Bergland Senior Vice President Hutchinson, Shockey, Erley & Co. rbergland@hsemuni.com 312.443.1566

2. Something Changes Every Year Our presentation will review changes in public finance FY10 & FY11 (as it relates to school districts), including local option sales tax, changes to fund transfers, issuer compliance and continuing disclosure, and legislative proposals Included are updates from the Capital Development Board (CDB), relevant extensions of current programs, and new developments in Springfield and Washington D.C.

3. Topics: • Build America Bonds (BABS) • Qualified School Construction Bonds (QSCB’S) • Interest rate penalty for Illinois bonds • Bond Insurance • Debt Service Extension Base (DSEB) Indexed to CPI • 1% Local Option Sales Tax • Transfers between WCF and operating funds • HLS Transfers to O&M • Lower EAV’s and Tax Rate Increases • Focus on Issuer Disclosure and Continuing Disclosure • Increasing Frequency of IRS Audits • Regulation of Financial Advisors • CDB and Construction Grants • Overview Pending Legislation

4. Build America Bonds • Taxable bond program with 35% subsidy paid from Treasury (IRS) • Expired after 2010 • The BAB program subsidized 2,354 issues and $181.5 billion of debt before January 1 expiration • $117B BABS in 2010; $26.04B in Illinois; $4.30B for IL Education • Based on the average yield of 6.2% under a Wells Fargo index tracking BABs, that implies $11.25 billion in annual interest costs and $3.94 billion in annual subsidies • Bills exist to extend program with lower subsidy; uncertain future

5. Qualified School Construction Bonds (QSCB’s) • Tax credit instead of interest payment • Not allocated outside Chicago by the State • Chicago Public Schools sold $257mm at net rate of 1.27% • Expiration year end 2011; some bills seek to extend

6. Bond Issuance Comparison Through April 2010-2011 Total 2010: $129.8B Total 2011 $61.1B

7. Interest Rate Penalty for Illinois Bonds • Long-Term fiscal challenges at State not addressed • Large supply of bonds relative to soft demand • Illinois Rates up - exacerbated by deficits • SD budgets affected by significant state funding component • New taxes won’t increase school funding (backlog) • Penalty additional 1/4-1.00%* depending on maturity, credit quality • No legislative remedies yet to ease budget stress • CDS on 5-year bonds a/o 5-5-11: IL 167, TX 60, WI 93, CA 189, NY 98, PA 84 • * Bond Buyer November 3, 2010

8. Bond Buyer Index Last 12 Months Through April Insert rate chart

9. Bond Buyer Index Last 30 Years

10. Debt Service Extension Base (DSEB) Indexed • In tax-capped counties, districts with DSEB indexed to CPI • 2009 grew only 1/10%, 2010 grew 2.70%, 2011 will be 1.50% • Example: 1mm DSEB in 2008 grew by $1,000 in 2009, $27,027 in 2010 and another $15,420 in 2011 (new DSEB $1,043,447) • Compounding effect over time

11. County School Facility Occupation Tax Law • Allows a county board to submit a ballot question to county voters to implement a sales tax for school facility purposes. • In 0.25% increments • Up to 1% • Tax imposed on the same general merchandise base as state sales tax, excluding titled or registered tangible personal property (such as vehicles, watercraft, aircraft, trailers, and mobile homes) and qualifying food, drugs and medical supplies.

12. County School Facility Occupation Tax Law • School Facility Purposes • Acquisition, development, construction, reconstruction, rehabilitation, improvement, financing, architectural planning, and installation of capital facilities consisting of land, buildings, structures, and durable equipment • Also includes fire prevention, safety, energy conservation, disabled accessibility, school security, and specified repair purposes set forth under Section 17-2.11 of the School Code

13. County School Facility Occupation Tax Law • Two ways to get question on ballot (regular elections only): • County Board may pass a resolution • School districts may pass resolutions • When school boards representing at least 51% of the student enrollment in the County adopt resolutions, the County Board must certify the question to the proper election authority • Enrollment means the head count of students residing in the County on the last school day of September of each year, which must be reported on the Fall Housing Report

14. County School Facility Occupation Tax Law • Form of public question (prescribed in law) • Shall The County of _______, Illinois, be authorized to impose a retailers’ occupation tax and a service occupation tax (commonly referred to as a “sales tax”) at a rate of ___% to be used exclusively for school facility purposes?

15. County School Facility Occupation Tax Law • A majority of the votes cast needed to pass • County Board then may adopt an ordinance imposing the tax • The ordinance and the election results must be certified by the county clerk and filed with the Illinois Department of Revenue • If pass in April, 2011, file with IDOR on or before October 1, 2011, tax begins on January 1, 2012

16. County School Facility Occupation Tax Law • Tax is collected by Department of Revenue and held by State Treasurer in the School Facility Occupation Tax Fund • By 25th of each month, DOR certifies to State Comptroller the amount to be disbursed to the Regional Superintendents of Schools for the counties where the tax has been imposed and collected during the second preceding calendar month • Within 10 days after receipt of certification from DOR, Comptroller causes ordersto be drawn for amounts contained in the certification • Within 30 days after receipt, ROE disburses sales tax proceeds to school districts

17. County School Facility Occupation Tax Law • Distribution of funds • Distributed on enrollment basis • Only students residing in the County are eligible for funding • Need to determine distribution process with ROE • Districts must deposit the sales tax proceeds in a separate School Facility Occupation Tax Fund which may only be used for school facility purposes

18. County School Facility Occupation Tax Law • New School Building Construction • No direct referendum required for new school building construction if building is completed with the expenditure of funds received from the sales tax.

19. County School Facility Occupation Tax Law • Alternate Bonds • No backdoor referendum • Do not count against debt limit • Revenue stream must be not less than 1.25 times debt service of all alternate bonds payable from such revenue source

20. County School Facility Occupation Tax Law • Duration • No limit in legislation • County Board may reduce or terminate tax at any time • Exception: • If a school board has issued bonds that are “backed” by proceeds of the tax, then County Board may not reduce or discontinue the tax if doing so would inhibit the ability of a school district to repay the outstanding bonds that are secured by the sales tax • If County Board reduces or discontinues the tax, another referendum must be held to increase or reimpose the tax

21. SB 2170—Amendments to CFST Law • Deletes alternate bond backdoor referendum exception • County Board is taken out of the process of imposing the tax • ROE puts question on the ballot • If referendum passes, the tax is imposed • County board may, by referendum, reduce or discontinue the tax unless doing so will adversely affect a district’s ability to pay its bonds secured by the tax or necessitates the extension of property taxes to pay the bonds

22. 1% Local Option Sales Tax (Results through April 2011)

23. Working Cash Fund Transfers • P.A. 96-1277, effective July 26, 2010 • May abate WCF by resolution at any time • Transfer money to fund most in need • Must maintain .05% of EAV in WCF • Cannot have excessive accumulation of money in the transferee fund • Validates prior abatements

24. School Fire Prevention and Safety Fund Transfers—Bonds • When purposes for which bonds were issued are “accomplished and paid for in full” • Remaining bond proceeds and interest earnings thereon must be: (a) used for other authorized life safety purposes; or (b) transferred to Bond and Interest Fund and used to pay life safety bonds • Bond and interest levy to be abated within 30 days by the amount of the transfer

25. School Fire Prevention and Safety Fund Transfers— Nickel Levy • P.A. 96-1474, effective August 23, 2010 • Until June 30, 2013, following a public hearing, can transfer “surplus life safety taxes and interest earnings thereon” to the O&M Fund “for building repair work” • No corresponding O&M Fund abatement required

26. Post Issuance Compliance — SEC • Continuing Disclosure • Increased Role of the SEC

27. Continuing Disclosure Undertaking • Rule 15c2-12 • EMMA – the Municipal Securities Rulemaking Board through its Electronic Municipal Market Access system • Word-searchable PDF format • Over $10,000,000 • Full continuing disclosure • Annual financial information • Audited financial statements • Reportable events

28. Continuing Disclosure Undertaking (continued) • Over $1,000,000 but less than $10,000,000 • Limited continuing disclosure • Financial information annually • Reportable events • Less than $1,000,000 • No continuing disclosure • Consequences for failure to comply • Bondholder may sue for specific performance • Disclose failure in future disclosure documents

29. Reportable Events • Principal and interest payment delinquencies • Non-payment related defaults • Unscheduled draws on debt service reserves reflecting financial difficulties • Unscheduled draws on credit enhancements reflecting financial difficulties • Substitution of credit or liquidity providers, or their failure to perform • Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the security, or other material events affecting the tax status of the security

30. Reportable Events (continued) • Modifications to the rights of security holders, if material • Bond calls, if material, and tender offers • Defeasances • Release, substitution or sale of property securing repayment of the securities, if material • Rating changes • Bankruptcy, insolvency, receivership or similar event of the District* ______________________________ * This event is considered to occur when any of the following occur:  the appointment of a receiver, fiscal agent or similar officer for the District in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the District, or if such jurisdiction has been assumed by leaving the existing governing body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the District.

31. Reportable Events (continued) • The consummation of a merger, consolidation, or acquisition involving the District or the sale of all or substantially all of the assets of the District, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material • Appointment of a successor or additional trustee or the change of name of a trustee, if material

32. Focus on Issuer Disclosure

33. Increased Focus on Issuer Disclosure (Cont.)

34. Increased Focus on Issuer Disclosure (Cont.) Electronic Municipal Market Access Data base for official statements, continuing disclosure, and pricing information: http://emma.msrb.org

35. Post-Issuance Compliance — IRS • Designate someone as a “compliance officer” • Maintain and regularly review a checklist of matters related to the issuance of your tax-exempt or Build America Bond indebtedness

36. Bond Audits • Receipt of IRS letter • Submission of bond documentation • Follow-up inquiry • Site visit

37. Lower EAV’s and Tax Rate Increases • PTELL formula may result in some districts reaching statutory rate limit • Implications: • Lose future revenue if “max rates” cap aggregate extension • May make it difficult to pass referendum (home values down, rates up)

38. Regulation of Financial Advisors • Broker-Dealers (acting as underwriters or financial advisors) are regulated by Financial Industry Regulatory Authority (FINRA) and the SEC • Independent Financial Advisors have not been subject to regulation • Various regulatory options being reviewed*: • Rule G-17** on fair dealing • Expand rule G-37 on political contributions (“pay to play”) • CE requirements, testing, professional and licensing requirements • “Promote the mission of ensuring both issuer and investor protection” • Modifications to G-23 could also prevent/curtail FA from switching roles and becoming the underwriter *October 12&14, 2010 Bond Buyer **G-rules refer to Municipal Securities Rulemaking Board regulations

39. Capital Development Board (CDB) and Construction Grants • State sold BABS, funded remaining 2002 list where uncompleted capital projects existed (23 total) • BAB’s sale restricted reimbursement to new money projects, but additonal funding coming from SB • Taxes funding new construction projects (SB 3097) challenged in court • Eighteen projects from FY03 list have been funded this fiscal year • Applications from FY04 will be contacted for updated application information in the future

40. Other Capital Grants • Energy Efficiency Grants: FY10 Capital Bill provided $50mm matching grants for up to $250,000 ($30 distributed FY11, $20mm distributed FY12) • Maintenance Grants: FY10 Capital Bill provided $100mm for School Maintenance Grants (funds not yet released); $50,000 per district • Early Childhood Grants: FY10 Capital Bill provided $10mm for Early Childhood capital projects, based on need in the community served (90% grant, 10% match)

41. Summary of Pending Legislation • School Consolidation (savings or retribution?) • 1% County Option Sales Tax (amendments) • Possible extension of Build America Bonds (BABS) with subsidy changed • Tax Exemption on the bubble (permanent BAB?) • Extension of Tax Credit Bonds (QZAB) • Pension Funding (Local funding?) • Responsible budgeting could lower • “Illinois Penalty”, but might negatively • affect school/other funding